professor ian sheldon: trade seminar cucea, universidad de ...in contrast, there was little in the...
TRANSCRIPT
Professor Ian Sheldon: Trade Seminar CUCEA, Universidad de Guadalajara
Mexico, August 18-22, 2014
Topic 5: The WTO, Development and Trade
Articles:
Kyle Bagwell and Robert W. Staiger, “An Economic Theory of the GATT”, American Economic Review, 1999: 215-248 Kyle Bagwell and Robert W. Staiger (2012), “Can the Doha Round Be a Development Round”, NBER Working Paper, 2012
Motivation (Bagwell and Staiger, 2012)
Key objective of Doha Round of WTO is to improve trading prospects of developing countries
Empirical evidence suggests developing countries have actually gained very little from GATT-sponsored trade rounds as compared to developed countries (Subramanian and Wei, 2007)
Developed countries have committed to deep cuts in their MFN tariffs over 8 trade rounds (see table)
In contrast, there was little in the way of tariff commitments by developing countries prior to the Uruguay Round of GATT
Due to exception to reciprocity norm for developing countries codified under “special and differential treatment” (SDT) clauses of GATT
Source: WTO World Trade Report (2007)
Tariff Cuts by Developed Countries
Tariff Bindings by Developing Countries
Motivation
Idea behind SDT – by getting a “free pass” on MFN tariff cuts: developing country exporters would share in the benefits of greater access to developed countries
Why has SDT apparently not worked? There is clear empirical evidence that developed countries have not found a way around the MFN principle (Bown, 2004)
Bagwell and Staiger (2012) argue that problem lies with the non-reciprocal approach embedded in SDT
Given that SDT approach lies at heart of Doha Round, they conclude that current negotiations will not generate any appreciable impact on developing country members of WTO
Trade in 2 goods between 3 countries: home country
imports good x from foreign countries 1 and 2, and
home exports good y to foreign countries 1 and 2; 1 and
2 do not trade with each other (see figure)
Local relative prices are , and , i=1,2
World price for trade between home country and foreign
country i is, , where pwi is country i’s terms
of trade
Given tariff structure of , and , domestic
relative prices are and , but as
home country applies MFN tariff, then , i.e.,
countries 1 and 2 face same terms of trade
Model
x yp p / p≡ *i *i *i
x yp p / p≡
wi *i
x yp p / p≡
t = 1+ *i *it = 1+wip p= *i *i wip p= (1/ )
w w wp p p 1 2
Home
Foreign 1
Foreign 2
y
y
x
x
t
t1
t2
Structure of Trade and Policies
Re-writing domestic prices and ,
and noting that home country terms of trade are
Once local and world prices are determined, production,
consumption, tariff revenue, imports an exports are also
determined
In turn for a set of tariffs once world price is
determined, , all local prices are determined,
, and
Market-clearing world price is that which ensures home
country imports of x equal sum of exports by countries
1 and 2, i.e., solves for:
(1)
Model
wp p= (1/ )*i *i wp p=
1/ wp
*1 *2( , , ) *1 *2( , , ) wp
( , ) w wp p p= ( , ) (1/ ) *i *i w *i wp p p=
*1 *2( , , ) wp
*1 *1 *1 *2 *2( ( , ), ) = ( ( , ), )+ ( ( , ), ) w w w w *2 w wM p p p E p p p E p p p
Trade balance requirements also met:
(2)
Market-clearing for y being determined by (1) and (2)
Each country is large such that change in its tariff
changes market-clearing world price:
(3)
and local prices also change with imposition of tariff:
(4)
Model
w w wp M p p E p p( , ) = ( , )
i i w w i i wM p p p E p p i* * * *( , ) = ( , ) for = 1,2
w w
*i
p p< 0 <
w *i *i w
*i
dp p dp ( p
d d
( ) , )> 0 >
,
Now suppose home country and country 1 negotiate
reciprocal reduction in tariffs, but country 2 takes a
“free pass”, leaving its tariff unchanged
Also assume that home country offers MFN tariff
reduction to country 2 as well
Assume initial and new tariff pairs for home and country
1 are, and , the tariff of country 2 staying
fixed at initial level ; also initial and new world prices
are and
Initial and new local prices in country 1 are,
and
Model
1( , ) *
A A
1( , ) *
B B2*
A1 2( , , ) w w * *
A A A Ap p 1 2( , , ) w w * *
B B B Bp p
* * w
A A Ap p p*1 1 1( , ) * * w
B B Bp p p*1 1 1( , )
Impact of SDT
Country 2 experiences no change in its trade volume when home and country 1 follow principles of non-discrimination and reciprocity
Country 2’s terms of trade, do not change, i.e., it enjoys by non-discrimination, same terms of trade as country 1, the terms of trade being unchanged due to reciprocity
Country 2’s domestic local price, is also unchanged, due to the fact that its terms of trade do not change, plus it does not cut its own tariff
With no change in domestic and local prices, country 2 experiences no change in production, consumption, tariff revenue, imports or exports
wp
*2 wp = p*2( , )
Home country cuts tariff on x, local price of x decreases
and world price of x increases - consumers in home
country import more x from country 1
Country 1 cuts its tariff on y, local price of y decreases
and world price of y increases - consumers in 1 import
more y from home country
Both home country and 1 gain increased market access
for their exports, but terms of trade remain unchanged
Country 2’s hope for a “free pass” to increasing exports
of y to home country thwarted by fact that it must
compete with “high-export-performing” country 1
Maxim: what you get is what you give in trade talks
Impact of SDT
Non-reciprocal approach will not deliver meaningful
gains for developing countries
Bagwell and Staiger (1999) have shown GATT-think is
about resolving terms-of-trade externalities of unilateral
tariff setting
Empirical evidence provides support for key features of
economic theory of GATT, e.g., Broda, Limao and
Weinstein (2008), and Bagwell and Staiger (2011)
Implies developing countries that can inflict “pain” on
foreign exporters, stand to gain from reciprocal trade liberalization
Implications for Doha Round
In markets that have never been covered by GATT, i.e.,
textiles and apparel, agriculture and footwear, SDT
should be rejected
May allow similar gains from reciprocity between
developed and developing countries
Key problem: reciprocal bargaining has gone on for 50
years between developed countries, i.e., tariffs already
low in many products
Consequently, developing countries are “latecomers”,
and concern is how to “make room at the table” when
there may be “globalization fatigue” among developed countries
Implications for Doha Round